• Euro tries to recoup part of Monday’s losses

• US stock indices trade sideways but volatility remains high

• Lighter US calendar but some interest on the 10-year bond auction

• Pound is on the backfoot after the weaker jobs data

The euro remains on the backfoot following Sunday’s European election results. The snap parliamentary elections called in France have been generating the most headlines, but the key event of the weekend was the very weak result achieved by the three coalition parties in Germany. From earning around 51% of the votes in the 2021 federal elections, the coalition crashed to just 31% support, raising questions about the viability of the existing government.

The euro remains on the backfoot following Sunday’s European election results

Germany is almost considered the “sick man” of the eurozone with the end-2023 court decision also limiting the government’s fiscal room for 2024. New federal elections are out of the picture, but a weakened German Chancellor could have severe repercussions across the world and on the geopolitical front, especially as the Ukraine-Russia conflict is apparently moving up one notch now that Ukraine has been allowed to hit targets inside the Russian Federation.

In the meantime, ECB members continue to comment on last Thursday’s rate cut with the overwhelming message being that ECB is not ready to embark on an easing spree. President Lagarde's comment that “interest rates are not necessarily on a linear declining path” confirms the market expectations for a quiet July meeting and raises a big question mark over the September gathering. ECB members Lane, Elderson and Holzmann will be on the wires today with the focus being on Holzmann, who was the sole dissenter in last week’s meeting.

President Lagarde's comment confirms the market expectations for a quiet July meeting

US stock indices continued their sideways movements with the one-month implied volatility remaining at the upper end of its 30-day range. Understandably, market participants are on the sidelines ahead of tomorrow’s busy schedule that includes both the May inflation report and the Fed meeting. However, these tentative movements in US stock indices could also be an indication of a rally exhaustion, which could lead to a sizeable correction if tomorrow’s risky events do not firmly open the door to a September Fed rate cut.

these tentative movements in US stock indices could also be an indication of a rally exhaustion

The lighter US calendar today includes the key 10-year US Treasury auction. Two weeks ago, a series of weak auctions caught the market’s attention after pushing yields higher and contributed to the month-end correction in stocks. Yesterday’s 3-year auction was mediocre at best, and it will be interesting to see how today’s 10-year and, more importantly, tomorrow’s 30-year auctions fare.

The pound is giving back part of Monday’s gains on the back of the weakness seen in the latest labour market data. The May claimant count change jumped to 50.4K, the highest print since March 2021, and the April unemployment rate ticked up to 4.4%. The pound’s weakness would have been more widespread if the average earnings growth figures did not remain stable with the indicator that excluded bonuses printing again at 6% year-on-year growth.

This weak labour market data was probably welcomed by the doves, but next week’s CPI report holds the key to an August rate cut. Considering that BoE members’ public appearances are kept to a minimum due to the looming general election, the June 20 gathering will most likely be a non-event as a dovish monetary policy statement could be misinterpreted ahead of the July 4 elections.